CFO World Blogs

It's the depreciation policy, stupid!

Michael Evans — Mon, 13 May 2013 16:14:20 GMT

A common problem in corporate real estate is when a property comes to the end of its useful life and needs to be sold and there is the dawning realisation that the net book value of the property is well in excess of the potential sales proceeds. Bad news - an unwelcome hit to the profit and loss (P&L) account and substantially lower cash receipts than may have been expected. It can be an excuse to stay put and do nothing, which is not good news for the business that has to put up with redundant real estate.

This doesn’t typically arise because the property has been re-valued upwards; corporate occupiers tend to record their owned properties at historic cost. The problems arise due to an inadequate depreciation policy.

International Accounting Standard (IAS) 16 governs the treatment of property assets and depreciation. Given that property depreciation is almost always allocated on a straight line basis, there are three critical components: the cost of the asset, its residual value and its useful life.

Very often the cost of owner occupied assets are higher, because corporates tend to build bespoke buildings geared towards their needs and aspirations, without the commercial discipline a property developer might provide. The cost of the asset may also be added to subsequently as capital improvements are undertaken.

When this happens, according to IAS 16, “the carrying amount of those parts that are replaced should be derecognised” - in other words - written off in the P&L account. However, in practice this rarely happens and the asset’s cost base simply grows.

Turning to the useful life of the asset, this is the period over which it is expected to be available for use and is defined in terms of the asset’s expected use to the business. There are probably two key issues here:

i) From a business perspective, what is the time horizon over which it is envisaged future economic benefits will flow from the asset?
ii) What is the typical life span of the asset beyond which it will be commercially obsolete and be likely to need significant refurbishment expenditure?

Corporates rarely, if ever, take these two critical considerations into account. They typically depreciate their buildings over a 30 to 40 year period, because that’s what they have always done. Whereas they would seldom, if ever, sign a 25 year lease; either because their business time horizon does not look that far ahead or because they have no confidence that the leased asset will still have a useful life beyond that point. Isn’t it time that some of that logic was applied to their depreciation policy?

Per IAS 16 “the residual value of an asset is the estimated amount that would currently be obtained from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.”

Corporates seem to only want to consider the value of their own properties based upon their own occupation. But that is not the premise of IAS 16; at the end of its useful life means that the building is no longer occupied by the corporate - it’s a vacant possession (VP) value. This may just be land value, although in the case of offices there is usually some value attributed to the fabric of the building.

VP values can vary significantly depending on the property cycle. For example, values of properties in the Thames Valley in 2007-08 were in the range of £200 to £300 psf whereas today such values may be £75 to £100 psf. All too often corporates find they acquire property at the top of the property market cycle and sell at the bottom but the residual value will rarely reflect that.

The combination of overinflated cost bases and excessive useful lives and residual values that bear little relation to the market mean that all too often the depreciation of property assets is understated and net book values are overstated in property accounts. So when you’re looking to sell that corporate property and you’re facing a huge loss - don’t blame the corporate real estate team, don’t blame the property market - blame the depreciation policy, stupid.

Where will our future CFOs come from?

Jamie Lyon — Fri, 26 Apr 2013 14:03:29 GMT

What will the future career path of a CFO look like? It is common knowledge that the role has been evolving for some time. However, much less discussed is what the implication might be for ‘where’ the future talent pipeline of finance leaders would come from?

There are a number of huge issues likely to shape the debate. In some quarters, we have seen more CFOs come from non-traditional finance and accounting backgrounds, particularly those with banking and deal-making in their career history.

Then there are regional trends as to the likely backgrounds of CFOs. One could also ask if the changing footprint and focus of business operations (more on emerging markets / less on western mature markets) might raise the longer term possibility of an increase in Asia-based CFOs leading western organisations in the future.

There are also other significant factors shaping the talent equation. For instance, the growth in shared services, outsourcing and the increasing trend towards global business services may significantly change the geographic footprint of future finance talent pools.

Another question is whether technologic changes would lead to exponential changes in the face of finance operations rendering traditional CFO / finance skills less relevant? One could also mull over whether finance functions are likely to reduce their headcount more generally and the finance talent pool shrinks as a result (the more for less idea)?

All of these things are quite possible, but I am bound to say that I still think there is a bright future for traditional finance and accounting training in the face of all these developments.

A core grounding in finance essentials is always likely to be beneficial, but also other attributes that can be gained through training towards a professional accounting qualification - a critical mind-set, being able to exercise professional judgement, and above all else the "independence" that finance professionals can bring to decision making that is enshrined in their training.

From me, these qualities should always stand the test of time. So I'd be interested to hear your comments and if you agree or disagree.

Merits of a forward-thinking approach

Mark Craddock — Mon, 15 Apr 2013 17:42:51 GMT

Newer, faster and more nimble - or staid, traditional and (dare we say it) even a little arrogant. If those are the answers, what’s my question?

Put simply, the first few words are how I would describe the actions of those countries which have been fast enough on their feet to respond to the economic crisis. The others are how I would describe UK plc’s somewhat slower approach.

It’s one which isn’t winning any friends in the recruitment market; with the economy at a virtual standstill there’s virtually no investment in jobs for the future.

Last month’s budget has done little to help and we’ve all seen the news from the Office for Budget Responsibility, which forecast the UK would see growth of only 0.6 percent this year, half what it predicted a few months ago.

This month (April) will see if Fitch makes good on its warning that it may follow in the footsteps of Moody’s and also downgrade the UK's credit rating.

So where have we gone wrong and where can George Osborne and his team learn lessons?

Maybe they would do well to talk to easyJet’s chief executive Carolyn McCall who recently presided over the low-frills airline’s promotion to the FTSE 100, after growing its revenue by 9.2 percent, increasing its passenger numbers by 6.2 percent for the quarter ended 31 December, and cutting its loss forecast.

The company was only launched in 1995, yet thanks to its pioneering use of the internet it has hit the fast forward button and now employs over 8,000 people, recently announcing recruitment plans for 200 new pilots in 2014 as it looks to expand still further.

Elsewhere, we are seeing strength in sectors such as oil, gas, natural resources, utilities and energy, together with the new dot com businesses who encapsulate the flexibility which success in today’s market demands.

It is exactly this ability to adapt which is separating the winners from the losers. Some traditional household giants are simply struggling to keep up. Note the speculation around a Qatari bid to take over that bastion of the High Street, Marks & Spencer.

And spare a thought for those who sell their goods and services abroad. Playing it safe and continuing to target the Eurozone ahead of fast-growing export markets such as China, Singapore, Brazil, Russia and India has left many UK exporters in the doldrums.

The EU is the UK’s main trading partner, worth more than £400 billion a year, but although the weak pound is good for exports no-one in the Euro has much of an appetite - or budget to buy.

Even now, the BRICs nations are demonstrating their own ability to change and “seize the day” by discussing plans to form a new development bank to fund infrastructure and development projects throughout the developing nations. The move is being seen by some commentators as a potential rival to the World Bank and, if it goes ahead, it promises another shake-up on the world economic stage.

Where does this leave us?

The reality is that the UK needs to invest in its own future by speculating to accumulate. There’s a limit to how long we can sit and wait for things to get better without making things happen for ourselves.

If UK plc really was a business, then its top team needs to be bolder, braver and much more radical to make a difference. When will they listen?

Cyprus: A sad story & a dangerous precedent

Kit Juckes — Mon, 25 Mar 2013 15:20:07 GMT

The back story in financial markets hasn’t changed much - the US economy continues to pull ahead, Europe is going backwards and the UK is going nowhere at all. The Japanese authorities are talking down the yen, except that now they are talking about the need to boost inflation, rather than mentioning the currency by name and (almost) any central bank with room to cut interest rates is doing so. But this is background noise as all eyes are focused on the news from Cyprus.

It has been known for some time that Cyprus, which joined the Euro as recently as 2008 - was in need of a bailout due to large losses sustained on investments by its banking sector in Greece. Once investors in Greek debt suffered losses, a knock-on was inevitable and given the size of Cyprus’ banking sector relative to GDP, outside help was always going be required.

The final details of the bailout agreed by EU leaders are still being worked on, but in broad terms, Cyprus needs around €17 billion, the equivalent of 100 percent of GDP. The first proposal, announced on 16 March, looked for €10 billion to come from the EU/IMF/ECB, while the rest came from within Cyprus in the form of privatisation, tax increases, and a levy on deposits at the country’s banks (€5.8 billion would be raised by taking a levy of 6.5 percent from deposits of below €100k, and 9.9 percent above).

That proposal triggered outrage both within and outside Cyprus, and represented the first time in this financial crisis that depositors would suffer losses. The subsequent deal, which seems to be going ahead, still sees €10 billion come from outside Cyprus. The country’s second-largest bank will go into ‘resolution’ and the biggest bank will be re-structured. Smaller depositors will be spared but those above €100k will be hit harder.

Cyprus’ problem is partly that its banks are funded almost exclusively though deposits, so that institutional investors are not suffering losses through default on bank debt. The other major problem is that since fiscal transfers are not allowable in the euro zone, any bailout comes in the form of a loan and to have gone above €10 billion was perceived as taking the country’s debt to GDP ratio to unsustainable levels.

There is still execution risk attached to the deal (can Cyprus deliver the promised austerity, and will they need to come back for further funds?) but market focus will now be on the decision-making process in Europe (unimpressive), the precedent (disturbing) and the economy (weak).

Cyprus’ banks will be left with fewer depositors and more dependence on the ECB for funding. The country will have to keep capital controls for some time to prevent further capital flight and economic pain will be inevitable. But for the rest of the world, Cyprus will return to being a small country at the eastern edge of the euro zone.

Wide-scale capital flight by depositors in other European countries seems improbable, regardless of scare-mongering. But institutional investors may be more wary of depositing cash with any but the largest banks in the stronger economies from now on. And all investors are likely to be a little more risk averse - keeping higher cash balances, perhaps and again, favouring national champion banks (the ‘too big to fail’ ones).

Bank regulators will be even more conservative as they see what happens when a banking sector needs a bailout, and this will increase the trend towards more equity, less leverage and less risk-taking on banks’ balance sheets. That may be desirable from a macro-prudential standpoint, but it will slow bank lending growth further and make the ECB’s task of easing monetary policy further.

There is no room for manoeuvre on European fiscal policy, so the burden of helping generate recovery falls on the ECB. So far, that hasn’t done anything to weaken the euro much, but as the Transatlantic growth gap widens, so the ECB will have to keep policy as easy as possible for (even) longer than the US Federal Reserve.

A weaker Euro seems inevitable albeit only in slow-motion, towards EUR/USD 1.20 by the end this year. By the same token, the euro’s woes have helped stop the rise in the EUR/GBP rate, and in a race to the bottom, the euro will fall faster than the pound, though both will slip against the dollar and probably, even against the Japanese yen too.

Old Dogs, New Tricks: Innovative ideas for recycling real estate

Michael Evans — Wed, 13 Mar 2013 15:33:10 GMT

Redundant real estate is not just a problem for the real estate industry; it’s a problem that faces all sorts of organisations in the public and private sector. The question that faces not just them, but UK plc as a whole, is how to recycle that real estate into productive use.

Whether it’s High Street shops, redundant manufacturing sites or 1970’s office blocks that don’t meet modern business needs, a lot of the old uses for real estate don’t work anymore. Traditionally, the real estate industry’s solution to surplus space has been to put up a “To Let” of “For Sale” sign and wait for the answer to arrive - but these days it is typically a long time coming.

So there is a significant challenge facing those organisations with redundant real estate. How do you deliver real value in such difficult circumstances? The answer, potentially, lies in thinking about new business models that fundamentally re-think real estate - both functionally and financially.

At the recent CoreNet Global’s 1 Big Day*, Jones Lang LaSalle sponsored a session with three inspirational speakers demonstrating that there are some new solutions for old property:
What do you do with a plot of surplus land on the edge of a railway line and the edge of the City, with development potential, but not for at least five years? The answer is Boxpark.

It is the world’s first pop up shopping mall with 50 retail units created out of sea containers. It’s brilliant. Roger Wade is the founder, creator and director of Boxpark which is fully let to a range of distinctive, edgy fashion labels and eating places.

It is achingly hip - exactly what you would expect in Shoreditch. At a time when the High Street is dying, this innovative solution re-thinks retail and creates a destination where people want to be. With limited upfront capital expenditure and a five year projected lifespan, it turns the economics of real estate development on their head. Another Boxpark is now being established in Amsterdam, so watch out for the spread of this pop up mall in the near future.

Mark Anderson, commercial and property director of Whitbread, has witnessed the growth of the Premier Inn brand by 50 percent in five years, with 180 new hotels and 14,000 new rooms. Their growth targets for the future remain ambitious and so sourcing sites and buildings that fit the bill in terms of size and location is critical. A large part of Premier Inn’s growth has been driven by change of use conversions including recycling student accommodation, residential and city centre offices.

The growth of hotels has helped boost local economies, particularly at night time. Perhaps, more importantly, for a large number of local authorities and corporates it has also enabled them to dispose of their 60’s and 70’s office blocks which have largely become obsolescent in today’s digital world, but often lend themselves to the configuration required for economy hotels. London Euston is an excellent example of an obsolete old office block which has been recycled into a Premier Inn and has revitalised the City Centre.

Central Working provides the ideal environment for growing businesses. It takes the serviced office and airport lounge concept and creates a brand new improved version - a dynamic collaborative space that reflects how people want to work, the growing trend of digital working in the 21st century.

The clubs are located in Bloomsbury and Shoreditch; the latter in the heart of “Tech City” London. Central Working believes its members deserve a beautiful place to work - with bespoke furniture meeting rooms, Skype booths and chill out areas - the design is conducive to collaboration which is Central Working’s core ethos.

A business model of partnering with corporates, lenders or landlords to fund the upfront capital costs and on-going operating costs, James Layfield, CEO of Central Working, can concentrate on creating the right environment for lots of small and medium businesses to grow and recycle some redundant offices along the way.

The environment welcomes all sorts of businesses and actively encourages their collaboration. Members can join The Board and participate in monthly moderated and confidential meetings to obtain insight into their challenges and opportunities. No wonder James has been courted by Google, Barclays as well as Prime Minister David Cameron.

These three different businesses have created innovative business models which reflect our changing world in terms of the way we work, shop and play - as well as creating exciting new ways to put property back to work. But surplus property remains a big problem. With resources often insufficient to adequately serve their operational portfolio, corporates, Local Authorities and Central Government barely have the time to think about their surplus real estate portfolio.

If they do turn their attention to surplus properties, which are usually old dogs, they will often procure the cheapest agent who is barely incentivised to spend the time and effort needed to solve the problem. For Local Authorities or corporates with large portfolios, they may be better advised to spend some time with Roger, Mark or James to really come up with something creative - old dogs, new tricks!

*CoreNet Global is a membership organisation for corporate real estate (CRE) and workplace professionals, service providers and economic developers. The CoreNet Global 1 Big Day was held at One Bishops Square, London, on Wednesday 27 February 2013.

HP affair underlines the power of four

Gaurav Sharma — Mon, 04 Mar 2013 16:29:31 GMT

The world of accounting is dominated by the ‘Big Four’ - PwC, Deloitte, Ernst & Young and KPMG - with few regional minnows having the clout or reach demanded by multinational corporations operating in several jurisdictions to challenge them. So when an accounting scandal of multinational proportions unfolds, it always holds the potential of drawing all of the Big Four in.

That is exactly what happened when HP claimed in November 2012 that it had been forced to downgrade and devalue a multibillion dollar investment by US$8.8 billion (£5.6 billion) after it "discovered" financial "misreporting" barely a year on from its acquisition of UK enterprise search firm Autonomy.

HP claimed that it revisited the Autonomy acquisition, completed in October 2011, after an ex-member of the latter’s management team came forward with worrying information. The global giant subsequently alleged that Autonomy had inflated its value through accounting tricks.

It promptly notified the UK's Serious Fraud Office and the US Securities and Exchange Commission about issues related "to accounting improprieties, disclosure failures and misrepresentations at Autonomy" prior to the acquisition.

Almost as promptly, Mike Lynch, former CEO of Autonomy, disputed HP’s stance and launched a very public campaign to counter the allegations. Deloitte, which was Autonomy's auditor at the time of the acquisition by HP, categorically denied that it had “any knowledge of any accounting improprieties or misrepresentations in Autonomy's financial statements.”

Regardless of the scale of the scandal or the merit of the allegations, you could be excused for thinking the matter merely concerned Autonomy’s auditors at the time, HP and the authorities. Well think again, because if nothing else, the scandal has unwittingly highlighted the queasy merry-go-round in the world of the Big Four.

For starters, we can already count Deloitte, who acted Autonomy’s auditors, as Player I. It seems that Player II would be Ernst & Young who are HP’s auditors with the global giant having been a proud client of theirs for years. Queries by CFOWorld suggest that before pen was put to paper to seal the deal, KPMG provided “advice” on the deal to HP; we’re up to Player III.

To clarify, a spokesperson for HP said that KPMG “audited” the deal. However, KPMG said it only provided a “finite” range of “pre-defined non-audit-related services.” And so to Player IV: In wake of the scandal, HP has hired - you guessed it - none other than PwC to conduct a thorough examination of what went wrong and repair more than just the financial damage. Of the four players involved, it’s Autonomy’s auditors Deloitte which has the toughest days and months ahead.

Autonomy founder Mike Lynch completely denied HP’s allegation and said it was a matter for the auditors. "I cannot understand how you can write down £5.6 billion of value and say somehow this was all caused by something you did not notice when you did due diligence with 300 people. It would be kind of a big elephant to have missed," he said within days of the scandal having emerged.

Regardless of Lynch’s stand, if HP’s claim is upheld then Deloitte will have some grave questions to answer as Autonomy’s auditor. However, the firm said it had followed all proper procedures.

“We conducted our audit work in full compliance with regulation and professional standards. We will cooperate with the relevant authorities with any investigations into these allegations," said a spokesperson.

If we hypothesise that Deloitte will be proved right, then Ernst & Young would be in a pickle. As HP’s auditor, it would have signed-off a mammoth corporate write-down. This would not only make uncomfortable reading for Ernst & Young but also raise pretty serious questions about competency. PwC has the relaxed position of conducting an outside-in examination and better still get paid to carry out the exercise. And well, KPMG is by and large out of the picture for the moment.

Away from the ledgers, there is another point worth pondering over - the blurring of lines between the auditing and consultancy services provided by the ‘Big Four.’ HP and its once prized asset Autonomy also employed one or the other of the ‘Big Four’ on a range of matters and they were by no means the only companies doing so. In fact, the consultancy side of the business of the ‘Big Four’ is booming, more so in this macroeconomic climate.

Multinational firms, where permitted by local laws, have hired the Big Four as advisers on anything ranging from product launches to executive pay. To cite an example, as permitted under local regulations, Deloitte LLP UK assisted Autonomy with ‘non-audit’ services which at times included setting executive pay and hiring, according to sources.

Spokespersons for the Big Four either side of the Atlantic Ocean described blurring of lines between the audit and advisory functions as being broadly “positive”, “value-added” and “compliant with jurisdictional checks pertaining to a particular market in question.”
“We cannot audit and offer advice on executive pay to the same client in the US. However, this is permitted in the UK at the moment,” explained one spokesperson. So what a layman would view as a single entity under a signature corporate branding is in fact a global network of loosely tied limited liability partnerships.

The merits or demerits of such a framework may well be debated but the HP-Autonomy fiasco has reinforced just how ‘big’ the ‘Big Four’ really are indeed. Queasiness in the corporate world stems from noting the nature of the auditing industry and the few avenues available when something goes wrong. The comfort - for the auditors and audited - stems from noting that such fiascos do not come along that often.

The spectre of 'currency wars'

Kit Juckes — Mon, 25 Feb 2013 16:54:16 GMT

‘Currency wars’ are all the talk of the City as some central bankers bemoan their super-strong currencies (for example - New Zealand, Switzerland, Brazil) while others adopt either covert (UK) or overt (Japan) weak currency policies.

The ‘currency wars' started in 2003, when the US Federal Reserve cut interest rates to 1 percent. Or maybe they started earlier still, back in 1992. That's when the Fed cut rates to 3 percent and forced countries in Asia that had pegged their currencies to the dollar, to cut interest rate and intervene maintain their FX pegs. Capital flooded in and bank lending surged, fuelling a property/credit bubble that became a crash, from Bangkok to Seoul.

The US cut rates in 1998 after a hedge fund went bust and that helped get the dot.com and housing bubble started. In 2001 the dot.com bubble burst and the economy went into the mildest recession ever. The Fed cut rates to under 2 percent (from over 6 percent) in 2001, but then went on cutting, to 1 percent in 2003.

That set global monetary policy on ‘Go’, and absurdly cheap money fuelled the credit bubble that turned into a banking crisis and the worst recession in a lifetime. Setting US rates ludicrously low also caused the dollar to go down - against the euro, the yen and even, until 2008, the pound sterling.

Now, with central banks running short on ideas to boost their economies and governments desperate for central banks to do more because they have (almost) run out of room to increase their borrowing, anyone who doesn’t want to set their interest rates at zero is lumbered with a strong currency and some of them don’t like it.

Indeed, the countries with huge current account surpluses and export industries that can live with a strong currency (for example Norway, Switzerland, Singapore), get strong currencies even if they do set their rates at zero. Many others are left with a policy mix they don’t want - rates too low that send asset (most visibly housing) prices up, and a currency that is too strong. You can count cranes in Toronto or watch a housing boom in Stockholm, the picture is pretty universal.

The world’s political leaders abhor currency manipulation - that is to say, they don’t like countries engaging in beggar-thy-neighbour policies to weaken their currencies - but they do like zero rates, and quantitative easing and anything that boosts global demand. That’s a bit like supporting war on condition that no-one gets hurt.

The US holds most of the cards - the Fed sets global rates and can finance its (huge) debt levels as other countries resist FX appreciation by intervening, and then buy US assets. But the US will also ‘win’ this war, as its economy pulls ahead of Japan and Europe's. Japan was the big ‘loser’ but is fighting back and increasingly it’s the Euro which is strong as the German contingent at the ECB finds voice and the sense of crisis fades.

In the background, a revaluation of the currencies of the ‘emerging’ economies, which have made huge leaps in their share of global economic output, is desirable but disorderly. And what of the pound sterling? Worst-performing of the major currencies since the crisis started, it can fall further. It seems that the Bank of England’s Monetary Policy Committee and the Government would welcome a weaker pound. It’s a shame that does so little to help exports, the benefit being eaten up so far in exporters’ profit margins.

The UK just doesn’t have many price-sensitive exporters anymore: They were all weeded out over years of a strong currency and re-balancing the economy with the help of a weak currency would/will take decades, and require fundamental industrial, educational and financial reform. So for now, a weak pound helps export profits more than export volumes, and drives up import and consumer prices for the rest of the economy. Thanks for that, Charles and Mervyn!

Great leadership is the key to success

Mark Craddock — Tue, 05 Feb 2013 17:34:27 GMT

HMV, Comet, Blockbuster - the demise of these well-known names over the last few months has lent an air of doom and gloom to the high street.

Yet at the same time, there are plenty of brands doing well. At the budget end, Poundland is estimated to have seen a 20 percent rise in sales over Christmas, Aldi experienced sales growth of more than 30 percent, Lidl's market share hit a new high and Primark delivered a 25 percent rise in sales for the three months to 5 January.

Holding their own in the middle ground are John Lewis, House of Fraser and Debenhams, all of whom reported strong Christmas sales, while luxury brands such as Burberry and Jaguar Land Rover are forging ahead with impressive sales and expansion plans.

Why are some companies getting it so right, and others getting it so wrong? I believe it is down to great leadership.

Staying in touch with your market, keeping the checks and balances in place to enable you to adapt quickly to change and maintaining an entrepreneurial spirit and a sense of innovation are the mark of those who are doing it right.

Knowing your customers is essential. Rather than having an online presence, Primark’s success came off the back of a good performance at existing stores, focusing on price competitiveness, keeping up with fashion trends and expanding its retail space.

Argos embraced technology and has reported healthy sales growth thanks to its successful move to click-and-collect online ordering, some 42 percent of its business is now done online and orders placed online via mobiles and tablets have more than doubled.
Click-and-collect sales now represent one-third of John Lewis' online sales and over 8 percent of total sales, further evidence of its ability to change with the times.

In the aviation industry, while regional carrier Flybe has announced plans to cut jobs, rival airlines Ryanair and easyJet have achieved success by adapting to changing markets. Ryanair recently increased its profit forecast for the full year after a better-than-expected performance in the last three months of 2012, and easyJet is reporting increased numbers of passengers and saw total revenue grow 9.2 percent to £833 million for the quarter ended 31 December.

Stark contrasts also exist in the technology market. Robust demand for Samsung’s Galaxy models has seen the company record a 76 percent jump in profits for the last three months of 2012.

Apple is also doing well, its phone shipments grew by 46 percent in 2012, but Nokia saw smartphone sales down 55 percent over the year as a whole, although they did rise 26 percent in the last quarter. Meanwhile BlackBerry has pinned its hopes of recovery on its new BlackBerry 10, launched in the UK at the end of January.

What lessons can we learn from these very different stories?

The IMF has already warned of a weakening global economic recovery and over the next two years says growth is likely to be at a slower rate than previously forecast.

What we can’t afford to do, is use that as an excuse not to move forward. Strong CFOs have the opportunity to deliver change and the success that comes along with it.

As the companies listed above demonstrate, the opportunities are out there and it’s time to grab them with both hands.

And while at one time the budget brands probably wouldn’t have figured particularly highly on a top CFO’s radar, today these are the ones setting the bar higher than ever for others to follow. Take note if you are making plans for a move this year, now is not the time to be a brand snob.

Leadership is the key to success

Mark Craddock — Tue, 05 Feb 2013 17:27:18 GMT

HMV, Comet, Blockbuster - the demise of these well-known names over the last few months has lent an air of doom and gloom to the high street.

Yet at the same time, there are plenty of brands doing well. At the budget end, Poundland is estimated to have seen a 20 percent rise in sales over Christmas, Aldi experienced sales growth of more than 30 percent, Lidl's market share hit a new high and Primark delivered a 25 percent rise in sales for the three months to 5 January.

Holding their own in the middle ground are John Lewis, House of Fraser and Debenhams, all of whom reported strong Christmas sales, while luxury brands such as Burberry and Jaguar Land Rover are forging ahead with impressive sales and expansion plans.

Why are some companies getting it so right, and others getting it so wrong? I believe it is down to great leadership.

Staying in touch with your market, keeping the checks and balances in place to enable you to adapt quickly to change and maintaining an entrepreneurial spirit and a sense of innovation are the mark of those who are doing it right.

Knowing your customers is essential. Rather than having an online presence, Primark’s success came off the back of a good performance at existing stores, focusing on price competitiveness, keeping up with fashion trends and expanding its retail space.

Argos embraced technology and has reported healthy sales growth thanks to its successful move to click-and-collect online ordering, some 42 percent of its business is now done online and orders placed online via mobiles and tablets have more than doubled.

Click-and-collect sales now represent one-third of John Lewis' online sales and over 8 percent of total sales, further evidence of its ability to change with the times.

In the aviation industry, while regional carrier Flybe has announced plans to cut jobs, rival airlines Ryanair and easyJet have achieved success by adapting to changing markets. Ryanair recently increased its profit forecast for the full year after a better-than-expected performance in the last three months of 2012, and easyJet is reporting increased numbers of passengers and saw total revenue grow 9.2 percent to £833 million for the quarter ended 31 December.

Stark contrasts also exist in the technology market. Robust demand for Samsung’s Galaxy models has seen the company record a 76 percent jump in profits for the last three months of 2012.

Apple is also doing well, its phone shipments grew by 46 percent in 2012, but Nokia saw smartphone sales down 55 percent over the year as a whole, although they did rise 26 percent in the last quarter. Meanwhile BlackBerry has pinned its hopes of recovery on its new BlackBerry 10, launched in the UK at the end of January.

What lessons can we learn from these very different stories?

The IMF has already warned of a weakening global economic recovery and over the next two years says growth is likely to be at a slower rate than previously forecast.

What we can’t afford to do, is use that as an excuse not to move forward. Strong CFOs have the opportunity to deliver change and the success that comes along with it.

As the companies listed above demonstrate, the opportunities are out there and it’s time to grab them with both hands.

And while at one time the budget brands probably wouldn’t have figured particularly highly on a top CFO’s radar, today these are the ones setting the bar higher than ever for others to follow. Take note if you are making plans for a move this year, now is not the time to be a brand snob.

Is talent really hardwired?

Jamie Lyon — Mon, 14 Jan 2013 10:46:46 GMT

Ever since the launch of McKinsey's seminal study on the war for talent in the late nineties, the prevailing wisdom has been that certain employees are more gifted and talented, and should be nurtured carefully and remunerated accordingly to ensure their full potential is reached. This thinking still dominates and remains the orthodoxy for many management practices on the subject.

But is it true to say that certain employees are more gifted than others and deserve special treatment in the finance function and beyond based on their natural ability? When we cast the net further and look at other fields of human endeavour, is there sufficient evidence to suggest that being skilled or talented is primarily a consequence of genetic hard wiring, more down to your chromosome inheritance than a case of practice making perfect.

Well, the evidence it would seem may be less compelling. Human history in fact is littered with examples of genius and talent that perhaps could be attributed more to hard work and sheer endeavour rather than innate talent in a particular field. Tiger Woods and Einstein are obvious examples that reflect the importance of industry, practice and dedication to a particular cause...

The debate has been reignited by some very interesting thinking by Matthew Syed, the British journalist, author and two time Olympian. In his book Bounce: The myth of talent and the power of practice, he articulates a rather contrary view to traditional thinking on the talent issue. In short, the key to achieving excellence is more highly dependent on practice, resulting in neurological brain changes that help unlock high performance. Innate ability starts to take more of a back seat.

So what are the implications for traditional approaches to talent development by organisations? Are some historic practices based on the notion of "A" players currently flawed? What are the implications for developing finance talent and future CFOs? One positive I do take from this is that the employee and finance "talent" pool may be much wider than previously considered. The other positive is about what sort of development interventions are likely to be most effective in developing the requisite skills.

A recent ACCA study on talent management in finance functions revealed significant angst with the effectiveness of current talent management approaches, and noted inadequate development interventions as a root cause of the problem. What came out of the study was that experiential learning, coaching and mentoring were critically missed and highly rated.

This makes sense and lends support to the argument that actually giving people great experience across the finance function and the opportunity to "practice" in business is the surest way to develop the skills needed by finance leaders.

It also implies previous talent development approaches based around the chosen few have overlooked the broader talent base that may exist across the function. To see the full report click here. I'll be returning to the talent issue again shortly...

Austerity & a tall, decaf, cappuccino

Gaurav Sharma — Tue, 18 Dec 2012 16:35:44 GMT

It’s been an interesting few months since joining CFOWorld in October, with talking points aplenty but none more contentious than the subject of austerity and a cup of coffee. In his autumn statement earlier this month, UK chancellor of the exchequer George Osborne told us what we all knew he was about to tell us - that the economic recovery was taking longer than he had anticipated.

Furthermore, Osborne also extended the age of austerity to 2018 and indicated that it would take £17 billion of extra cuts per annum to hit the current debt target. He announced that the government is sticking to its current (lack of) spending plans. After all, “we’re all in this together” said the Chancellor; “some more than others” rebutted his opponents.

Economic growth will be stunted but it’s not wretched (yet)! According to the Office for Budget Responsibility (OBR), the UK economy will see -0.1 percent growth in 2012 followed by 1.2 percent next year, then 2.0 percent in 2014, 2.3 percent in 2015, 2.7 percent in 2016 and 2.8 percent in 2017.

On the deficit front, the OBR forecasts a fall from 7.9 percent in 2011 to 6.9 percent in 2012, then 6.1 percent, 5.2 percent, 4.2 percent, and 2.6 percent, reaching 1.6 percent in 2017-18. So in announcing cross-departmental cuts, bar investment in the NHS and schools, Osborne doggedly stuck to his opinion that public sector cuts and job losses would be made up by the private sector.

To that effect, and perhaps nods of approval from CFOs up and down the country, he announced that the UK will lower its headline rate of corporation tax from 22 percent in 2013 to 21 percent in 2014. However, the government's bank levy will increase from 0.105 percent of banks' balance sheets to 0.130 percent, Osborne said. Predictably, the business lobby groups lined-up to commend the cut.

However, an unscientific snap poll of ten economists, undertaken by this humble blogger, saw majority of them opine that despite the positivity surrounding it, drawing a linear connection between a tax cut and fresh recruitment by corporations was not clear cut.

“While companies should welcome the move, those who wish to hoard cash and hold back investment will wont embark on a job creation spree just because the headline rate of corporation tax is down by 1 percent,” said one economist.

Another suggested the Chancellor’s spiel was aimed at attracting foreign direct investment which sounds logical. After all, Osborne urged investors to: "Come here, create jobs here; Britain is open for business. This would be the lowest rate of (corporation) tax for any major Western economy."

After carrying disappointing economic data in his briefcase, extending austerity until 2018 and bruising exchanges in the Commons, Osborne could well have done with a cup of strong coffee in the absence of something stiffer. If something caffeine-laden was his only option then it’s doubtful he went to Starbucks! There is something about coffee chain as the great British public have realised.

In the late-1990s romantic comedy You’ve Got Mail, Hollywood actor Tom Hanks, noted, “The whole purpose of places like Starbucks is to make people with no decision making capabilities to make six decisions just to buy one cup of coffee. ‘Short’, ‘tall’, ‘dark’, ‘caf’, ‘decaf’, ‘low fat’, ‘non-fat’…cappuccino. So people who don’t know what the hell they are doing or who the hell they are, can - from US$2.95 - get not just a cup of coffee but an absolutely defining sense of self.”

To put the price quoted by Hanks into perspective, You’ve Got Mail was released in 1998. That same year Starbucks arrived in the UK. In nearly a decade and half since, Starbucks has emerged from a low key start to an established presence on the UK High Street. Problem is they haven’t been paying too much tax on their record earnings.

One mid-October afternoon, British TV screens, newspapers and websites went berserk, when Reuters reporter Tom Bergin - the journalist who wrote extensively about the goings-on at BP in wake of the Gulf of Mexico oil spill - revealed that accounts filed by Starbucks’ UK subsidiary had racked up over £3 billion (US$4.8 billion) in coffee sales, and opened 735 outlets but paid only £8.6 million in income taxes, largely due because the taxman disallowed some deductions.

Furthermore, over the past three years, Starbucks had reported no profit, and paid no income tax, on UK sales of £1.2 billion. Starbucks was promptly hauled before the parliamentary Public Accounts Committee (PAC) chaired by MP Margaret Hodge and lectured that what it did was ‘immoral’ though not illegal.

The coffee chain admitted that the Dutch government had granted it a “special tax deal” on its European headquarters, which in turn receives royalty payments from its UK business. All coffee was purchased via a front company in Switzerland and so it went.

The PAC then called for the HMRC to be more aggressive in tackling tax avoidance. Osborne promptly gave it £77 million to do just that. Other tax avoiders, using existing legal loopholes, continued to drop out of the woodwork - Google, Amazon, Ebay, Capgemini, Accenture, Ritz Hotel and Facebook to name a few.

However, two months into the row, Starbucks became the infamous poster bearer for the tax avoiders. It even faced calls for a boycott of its shops by some. So on 7 December, Kris Engskov, managing director of Starbucks UK, took out full-page advertisements in all leading newspapers announcing that the company would pay “more” tax in the UK.

In it, he noted, “We know we are not perfect. But we have listened over the past few months and are committed to the UK for the long term. We hope that over time you will give us an opportunity to build on your trust and custom.”

However, a stern rebuke followed from Treasury secretary Danny Alexander that “tax was not optional”, Hodge sneered at the attempt and London Mayor Boris Johnson told people not to sneer. Right now, the whole issue has descended into a jolly emotive mess where rhetoric gets the headlines.

In what we describe as a European common market, getting a company which has adopted one low tax jurisdiction as a hub to then not employ additional layers of tax mitigation measures in other jurisdictions where it operates within the common market to maximise its turnover, would be very hard to enforce. In fact, Amazon and Google have already responded by saying they would not follow Starbucks’ lead and pay more tax.

Here’s hoping the Chancellor’s cut in the headline rate of corporation tax would bring these companies around to the table and a less emotive dialogue about who should pay how much tax will follow. They’ll need some pragmatic decision making at that table and maybe everyone could also do with a cup of tall, decaf cappuccino and a defining sense of self!

Where next for the job-hungry CFO?

Mark Craddock — Fri, 30 Nov 2012 15:03:25 GMT

Sometimes it seems as if the world economy is on a rollercoaster. Plenty of ups and downs, a few big dippers - mostly in the Eurozone - and, until recently, a reasonably steady incline among the more developing markets.

Now however, China’s economy is cooling, as the likes of Burberry have found out to their cost, while in India GDP grew just 5.3 percent in the first quarter, the slowest for nine years.

Figures released in October showed China’s economy has slowed for a seventh quarter, as problems in Europe and the US impacted on demand for its products. On the plus side, there are indications that things may be starting to improve, with rises in industrial production and higher retailer sales driven by domestic consumption.

Meanwhile, growth in Brazil, thought of as another potential powerhouse, is predicted to be less than 2 percent this year, its weakest annual performance since 2009.

For the CFO on the move, it’s not just economic concerns which can make these destinations a less attractive option.

Doing business in developing countries can be very complex. Many are highly regulated in terms of inward investment and employment legislation and there’s a real feeling that although it might seem like a good opportunity, it’s not always as easy as it might first appear.

All of which begs the question, if you’re a CFO looking for the next big move in his or her career, should you seize the moment to make your mark in a developing economy which, even though it might be slowing, is at least still growing? Or do you play it safe and choose a more traditional base like London or New York, which are still seen as the powerhouses of the world economy?

Evidence from the “shop floor” shows it is these bastions of the financial markets which are standing up better than their developing market counterparts and it’s in London and New York where we’re seeing a steady increase in demand for top level finance executives.

The US may be struggling under piles of debt and the need to create more jobs but despite the gloomy headlines its economy grew at 2 percent - more than expected in the three months to September.

And no sooner had President Barack Obama been re-elected than our own Prime Minister David Cameron was calling on him to work together to “kick start the world economy” and saying he wants to see an EU-US trade deal.

Indeed, the UK received its own shot in the arm last month when preliminary GDP figures were released which showed the economy had emerged from recession with growth of 1 percent. Boosted by sales of Olympic tickets and with a 1.3 percent growth in the service sector reversing the recent downward trend, the news exceeded the expectations of economists.

Recently there has also been some light relief with slight improvements in the manufacturing and service sectors, and unemployment is reducing as the economy continues to create new jobs - albeit as productivity is falling.

Experience shows however that the City of London is still “the place to be” for enterprising and ambitious CFOs and it’s the more traditional sectors such as energy, oil, gas and mining, which are standing up well against the newcomers such as Facebook and Manchester United, whose stock market debuts have been less than outstanding.

If change is what you are after, then think carefully. As appealing as the “new frontiers” might be, is now really the time to take a risk with your career?

Where next for the job-hungry CFO?

Mark Craddock — Fri, 30 Nov 2012 15:03:25 GMT

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Administrator (Tweetie Pie) — Mon, 26 Nov 2012 10:46:14 GMT

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Saving lives

Adam Bates — Fri, 09 Nov 2012 16:54:36 GMT

Living in London I take quality healthcare as a given. A few weeks ago I was speaking at the TEDxKPMG DELHI conference in Delhi, India. Two of the speakers, Dr Amit Chatterjee & Rohit Bhasin, opened my eyes to another world.

First, rural healthcare. As some of you will know, one of the key health performance measures is the Infant Mortality Rate (IMR). It is the number of deaths of infants under one year old per 1,000 live births. In the UK, IMR is about 5. The UK ranks below many countries including all the Nordics. In one of the poorest states of India the IMR has been about 61. Hence, proportionately more than ten times as many babies died in their first year in this state as in the UK. In anyone’s book that is terrible.

Dr Amit Chatterjee is medical doctor who joined KPMG in India earlier in the year and has become a good friend. He specialises in helping communities in India who cannot afford the most basic of healthcare.

He has been involved in a project in India aimed at improving the most basic of care. It required a relatively small amount of funding. After a fair amount of analysis, the project was able to help implement a number of improvements in infrastructure, better availability of staff and some other good practices.

During 2012, the IMR has fallen to something like the mid-40s. This is still relatively poor. But in human terms the improvement means that more than 10,000 babies in the state will survive beyond their first birthday this year.

Secondly, basic hygiene. Millions of infants die each year from diarrhoea and acute respiratory infections. According to a number of studies getting people to wash their hands and use soap is the most cost effective health intervention to prevent infant mortality through preventing much of this diarrhoea and infections.

Rohit Bhasin promotes Lifebuoy disinfectant soap. For those who do not know, Lifebuoy soap was launched in 1894 to combat cholera. Rohit is on a mission to educate people across the developing world to wash their hands five times a day with soap. Aside from selling more soap, for Rohit the other driver is quite simple; savings childrens’ lives.

The team has initiated all sorts of activities to raise awareness of washing hands. World records have been set, educational activities, games and many others which have reached hundreds of millions of people across the developing world.

These are two very special individuals whose passion saves lives yesterday, today and tomorrow. Since the conference I have found it hard to forget their stories. All of us cannot aim to save lives every day. But, I do think that we can apply some of the lessons to our own businesses.

I would highlight:

• Making significant positive change does not always require huge buckets of money.

• Passion, analysis, evidence and persuasion are needed to change engrained habits.

My final thought. As we move to 2020 it will be more and more important for businesses to have a purpose beyond simply making money. Is the purpose of your company clear?

A retail revolution

Adam Bates — Thu, 27 Sep 2012 10:13:34 GMT

Growing up in Belfast in the 1960s I remember milkmen, bread vans, fishmongers and a butcher all delivering fresh produce to our home. Over the next 40 years these tradesmen virtually disappeared as the supermarket chains developed. But I believe we are in the midst of a retail revolution that will bring back much of this convenience and personalisation.

Two elements will make this work. First, making ordering and getting the goods to your home fun and easy. Secondly, dissolving the barrier between the physical and digital worlds.

Tesco recently won an innovation award for its Korean subsidiary. In some underground stations in Seoul life-sized posters of Tesco’s shopping aisles have been put up along the platforms. Commuters can walk up and down the posters shopping using their smartphones to read the QR codes on the posters. Similar posters were recently put up at Gatwick airport. A great and fun use of dead time!

In the UK, John Lewis offers a “click by 7pm, collect next day from 2pm” service. Indeed all the major supermarkets offer a delivery service which strangely starts to feel like Belfast back in the 1960s! Tesco recently announced that it was expanding the number of its so called “dark” stores, which are designed simply to fulfil online orders from customers in the area.

However making the online experience richer may be the next step. Tesco is looking to launch a 3D experience for home shopping. Imagine flying through a supermarket and being able to move up and down the aisles looking at different types of goods … without leaving your living room.

Clothes shopping is also moving with the times. Various start-ups are looking to use clever technology to make the shopping experience better both for the customer and for the shop.

Von Bismark (from Ireland!) is using the Xbox Kinect to allow shoppers to look at themselves on a screen and then see how virtual clothes and different accessories suit them. For the right age group, it is fun and natural. Indeed if they like the look the shopper can post the photograph on Facebook. The shop benefits because it is able to analyse the data and understand what colours and garments suit different demographic groups.

Verisize from Spain makes it easier for customers to order the right size. The customers enter their size, weight, and age and body type. The shop has a better chance of sending out a garment which fits. Ultimately this means fewer returns and higher profits. Of course it relies on the customer being honest!

By 2020 most of us will have accurate body scans stored online and it will be as easy to order uniquely styled clothes as it is to buy a book from Amazon today. Shopping at home will be immersive and some people will never need to walk into a shop.

As always in this column, I ask a simple question. Who in your organisation is responsible for scanning how advances in technology, perhaps driven by innovative start-ups, impact your industry?

Comply or explain

Michelle Perry — Tue, 21 Aug 2012 11:50:41 GMT

I find it curious that after 17 years in exile Asil Nadir, the former chief executive of collapsed conglomerate Polly Peck International (PPI), returned to the UK in 2010 to face charges of theft.

This week he was found guilty of three counts of theft at the Old Bailey. In one of the biggest trials of its kind in a UK court a jury has to decide whether the 71-year old entrepreneur is guilty of 13 charges of alleged theft totalling £33.1 million and $2.5 million from Polly Peck International between 1987 and 1990.

The case, according to the Serious Fraud Office which is prosecuting it, concerns however the alleged theft of the largest sum of £146 million from PPI in financial transfers.

Over a decade ago as a cub reporter on a financial newspaper I was writing about the aftermath of Nadir’s flight to Turkish Cyprus, which has no extradition treaty with the UK. I was covering an audit regulator’s investigation of PPI’s auditors - Stoy Hayward (now BDO Stoy Hayward) - into why they hadn’t uncovered the financial irregularities.

Chris Dickson, at the time executive counsel to the audit regulator - the Joint Disciplinary Scheme - laid complaints against BDO for the audits of PPI's accounts for the years ending 31 December 1986, 1988 and 1989. Complaints were also laid against the audit firm for its work as reporting accountants for a rights issue in 1989 when Del Monte was acquired.

For those who don’t remember, Nadir turned a small textiles company in the East End of London into one of the UK’s top companies worth £1.7 billion at its peak. The multinational conglomerate, whose goods and services ranged from electronics to leisure and the Del Monte fruit group, collapsed in October 1990 with borrowings of £522 million.

After PPI went into administration the company was found to have an almost complete lack of internal controls at its London office, allowing Nadir to transfer vast sums from the company's London bank accounts without question.

For its role as auditor Stoy Hayward was fined £75,000 and ordered to pay £250,000 in costs in January 2002.

As PPI collapsed the Cadbury report -- on which the UK’s corporate governance code is founded -- was being drafted. Its recommendations focused largely on the control and reporting functions of boards and on the role of auditors.

Naturally Nadir claims he is innocent of all charges and his return to Britain is about fighting “the injustices that I was suffering”. Many observers have noted that the coincidence or not of Nadir’s return to Britain under a Tory government. Perhaps Nadir thought the distractions of a global financial meltdown and an economy in recession would soften the blow on him. What he didn’t reckon on though was a double dip and the public’s mounting anger at overpaid executives and bankers.

The jury of 10 was sent home last night and were due to resume deliberations on the remaining nine counts of theft against Nadir today.

Many argue that Polly Peck and other financial scandals at the time (BCCI) were Britain’s Enron and WorldCom. But while the US justice system has jailed many of the executives involved in those corporate frauds, Polly Peck shareholders would argue that the UK has failed to see justice done in PPI's case. Many issues remain unresolved. Will the jury at the Old Bailey final put them to rest today?

Living in a box

Adam Bates — Thu, 09 Aug 2012 14:15:08 GMT

For me, watching the Olympic Games opening event was one of the most exciting TV experiences of my adult life. As the Queen turned to James Bond to say hello I was clapping and cheering. As Beckham smirked as he steered the boat down the Thames I was whopping and laughing. It was a real experience for me. Not just a night in watching TV.

What made it even more special is that I had my iPad on my lap watching people’s tweets about the games and indeed tweeting myself. The ironic humour and sharp comments really made me laugh. At the same time Natalie, my secretary, was following Facebook on her iPhone catching up with what her friends were doing; indeed one of them was backstage posting photos.

When I was a boy I watched TV programmes such as Dr Who, Mission Impossible and Z-cars with complete focus on a flickering low resolution black and white screen. Today, we are quickly moving in an age when many people are not satisfied with watching just one screen, but demand a dual- or multi-screen experience.

This autumn the BBC is experimenting with the Antiques Roadshow offering viewers the chance to guess the value of items on their device and to find out more about the antiques shown on the programme.

Channel 4 is experimenting with a “noisy” Heat4 experience (which offers viewers a second-screen experience with bespoke content) with Hollyoaks. ITV already has proven success with Britain’s Got Talent, which had 250,000 people using its companion app.

Shazam (that wonderful music recognition app) earlier this year extended its features to recognise when an advert is playing and launch a made-for-second-screen advert. So it really is taking off in the year of the Olympics.

What will happen in the future? I think there will be several themes.

First, advertisers will have to find new ways of getting people to interact with their brands in compelling ways so that viewers do not simply pause or fast forward through the adverts using features on advanced boxes.

I believe that “interact” is the key; whether this is voting for an outcome, chatting to a character, entering a competition or giving an opinion. It is the two way interaction that will create the intimacy and connection.

Secondly, programming and advertising will become personalised to the individual viewer. TVs will be able to locate and filter content for the individual producing personalised TV channels [no Hollyoaks for me please]. In addition, the outcome of programmes you are watching may depend on your personal preferences.

Finally, as we move from 2D screens to 3D and into holograms imagine watching Britain’s Got Talent with Simon Cowell sitting on the sofa beside you!

I have one question for you: are you happy your marketing department is absolutely on top of this enormous change in human behaviour?

How happy is your company?

Jaime Lyon — Thu, 26 Jul 2012 10:54:39 GMT

How will you measure your life? It’s a big question that troubles those of us with a philosophical bent. Perhaps for understandable reasons however this question may not always be at the forefront of the finance chief’s mind, but there are some useful business analogies worth considering.

Clay Christensen, the Harvard Business School professor recently published a book called How will you measure your life? He artfully draws parallels between how companies are run, and strategies often mismanaged, and how human beings make the same mistakes in their own lives with an unhappy outcome.

One of the key analogies he draws out is that when you look at a company, its strategy is principally dependant on its investment approach. In short, how the business allocates its resources and funds ultimately determine its level of reward.

According to Christensen, one of the key problems here is that the decision making systems typically direct funds towards those investments that offer the quickest and more visible returns, but which aren’t the best option for longer term sustainable performance and success. I think we are all familiar with this tale.

He then overlays this observation on how people live their own lives. He cites examples of fellow MBA classmates who have become less fulfilled and happy in their personal lives because of divorced or losing touch with their children, for instance.

Clearly these individuals would not have purposefully chosen such outcomes, yet his observation is that many of them followed ‘strategies’ in their personal lives that achieved just that result.

At the heart of the problem, Christensen says, is poor investment strategies and choices from the outset. He observes, in particular, that high flyers spend their earlier lives building up careers because the rewards (money, status, etc) are more immediate and tangible.

In contrast, investments in the things that ultimately will bring the most happiness and success in the long term - for example, raising a family, pay over a much longer time frame. [If you have a spare 15 minutes (unlikely, I know), click here for his musings.]

I think it’s a very interesting idea. One thing that strikes a chord is the amount of effort and time that ambitious finance professionals and CFOs expend in pursuing their careers and, when they get there, the demands of the top finance role.

Having recently held a number of CFO roundtables in different markets around the world to discuss the challenges facing today’s finance chiefs I couldn’t fail to notice that one common issue continued to crop up - the time demands placed on the role and the level of personal commitment needed and expected.

It seems to me that getting the balance right is increasingly difficult for senior finance people these days. I hope this doesn’t mean today’s CFO is destined to ultimately lead an unfulfilled life.

Are CEOs heeding internal auditors?

Ben Griffiths — Tue, 24 Jul 2012 14:21:10 GMT

The tenth anniversary of one of the biggest fraud scandals in corporate history passed last weekend without fanfare. Yet vital lessons are still not being learned.

Collapsed US telecoms giant WorldCom filed for bankruptcy on 21 July 2002 after a fraud worth $11billion (£7 billion) was discovered. It came soon after the Enron scandal and has been followed by a host of major corporate scandals, from the mis-selling of payment protection insurance in the UK to the bailout of global financial institutions by national governments around the world.

More recently Barclays’ admission that it was involved in the fixing of Libor - a key interbank interest rate used to price a range of financial products - saw chief executive Bob Diamond fall on his sword while claiming he had no idea what was going on in the bank he headed.

Earlier Rupert Murdoch, head of media giant News Corp, had denied all knowledge of phone hacking at the News of the World or a subsequent cover-up during interrogation by MPs in a House of Commons inquiry.

All these incidents share a failure of senior managers to really get to know the companies they were running and to understand what was happening further down the food chain.

The Chartered Institute of Internal Auditors (IIA) warns that the lessons of WorldCom have not been learned a decade on from its collapse. Then its small team of internal auditors were credited with alerting the company and regulators to the massive fraud.

Yet today an apparent lack of awareness of the problems at scandal-hit companies among senior executives proves internal audit is not being used as effectively as it could be.

When bosses try to hide behind the excuse that they didn’t know what was going on under their noses it’s easy to accept the comments as a handy excuse. But when most large corporations employ teams of internal auditors to help prevent accounting and other scandals by identifying risks and managing governance issues it is an absolution that fails to stack up.

As IIA chief executive Dr Ian Peters says internal audit is there to be the eyes and ears of senior management within their businesses. Yet bosses have to want to use these precious resources properly.

Used well internal audit can make sure controls are working properly, problems can be identified and fraudsters caught before they become an even bigger problem.

Dr Peters points to WorldCom as showing business three lessons that have still not be learned:

·         The tone being set at the top of a company is vitally important to the overall culture.

·         Management must strive to learn what is going on across the entire business.

·         Executives must be receptive to and act on the advice of internal auditors.

Rather than being regarded as the geeky beancounters who turn up to hamper the normal day-to-day operations of a business, management should encourage these internal investigators to flag up the early signs of minor problems so major headaches can be averted in good time.

Are non-execs failing to do their job?

Ben Griffiths — Thu, 19 Jul 2012 10:21:20 GMT

Should regulators be able to bring arbitrary pressure to bear on the boards of private companies?

If you listen to Andrew Tyrie, chairman of the House of Commons treasury select committee, then the answer is a resounding no.

Tyrie’s committee has been grilling Barclays executives past and present as part of a probe into the rigging of the London inter-bank offered rate - a key measure used to set the interest rate for a range of financial products around the world.

During a session with Bank of England governor Sir Mervyn King, Tyrie’s committee were curious to know why King, along with Financial Services Authority head Lord Turner, had the right to force the resignation of Barclays boss Bob Diamond.

It had earlier emerged that Diamond reverse his decision not to resign over the Libor scandal after the Bank and FSA made it clear they would rather he left. This left Diamond’s position untenable just days after he had insisted he was going nowhere.

Tyrie argues that whatever the merits of the action taken in the Barclays case, regulators should not be able to oust company directors in such a fashion.

Casting aside the thinly veiled message from Tyrie - that Sir Mervyn King has become too powerful in his role - the cover-up that followed Libor-fixing raises interesting questions about corporate governance.

If non-executive directors and chairmen were doing their jobs properly, reining in the excessive behaviour of senior company executives, then perhaps we would see fewer examples of risk-taking gone mad. Or the kind of polluted culture that US lawmakers suggested existed at HSBC earlier this week when it apologised for failing to stop money laundering at its banking operations.

The same failures occurred at Royal Bank of Scotland when Fred Goodwin was allowed to run riot on a crazed acquisition spree that almost brought down the bank before it was rescued by taxpayers’ money.

Or at G4S where chief executive Nick Buckles is currently under fire for failing to recruit the 10,000 security guards needed for the Olympics. If only the chairman or non-execs had suggested that this was perhaps a rather ambitious target for the company to hit perhaps Buckles would not now be fighting to save his job.

It’s clear there remains a need for greater stewardship of our companies both from within by the non-executive board members, and from outside from institutional investment managers, who can wield the kind of power that has ousted the likes of Andrew Moss at Aviva, Sly Bailey at Trinity Mirror and David Brennan at AstraZeneca.

These high-profile scalps only came about because shareholders decided enough was enough on executive pay when excessive rewards were handed out despite lacklustre long-term underperformance.

Now that the ‘shareholder spring’ is beginning to fade, perhaps it is time for a winter of discontent on wider corporate governance issues. Companies will sit up and listen when non-executives, investors and the public take a stand.

The fight for top quality non-execs

Ben Griffiths — Tue, 10 Jul 2012 12:06:05 GMT

Non-executive directors are now more important than ever. Companies and investors are under pressure to improve their stewardship of business amid widespread criticism of corporate excesses.

Britain’s ‘shareholder spring’ clearly demonstrated that activism is on the increase, with a correlating rise in the significance of non-executive responsibilities.

That means the role of a non-executive is becoming more onerous, with longer hours, a need for broader skills and the necessity to have a deeper understanding of a company’s culture and behaviours and the challenges these may present.

According to research by recruiter Korn/Ferry, these factors have meant individuals are restricted in the number of non-executive roles they can take on. That has clear implications for the talent pool. Not enough people are available to fill the non-executive posts in the boardrooms of UK plc.

Korn/Ferry has questioned 50 leading chairmen, chief executives and non-executive directors to ask what makes an exceptional non-executive. Traditionally non-executives were recruited for their independence, ability to challenge and excellent communication skills.

The best were well respected and experienced business people who could guide and offer advice, while keeping check on wayward chief executives. Of course there have been high profile failures - Royal Bank of Scotland is a good example - when non-execs failed to keep errant bosses under control.

Sir John Peace, chairman of Standard Chartered bank described the basics of true independence and integrity as still being of fundamental importance. However, he says that all the new, additional responsibilities have made the job challenging and time-consuming.

New skills include understanding risk, numeracy and finance and technology - all of which are only likely to become more important against the backdrop of more regulation, improved governance and greater scrutiny.

Ken Olisa of Restoration Partners described the old non-executive role as akin to joining an exclusive club. Today, he says, it’s a more serious job.

With the increased commitment and skill requirements comes the inevitable question of remuneration. Non-executives were typically paid a relatively small amount given they worked a part-time job. This also allowed them to rack up a number of non-executive directorships. As that is now increasingly difficult to manage, perhaps non-exec candidates need to be offered more to attract them to the job?

While the pay scales should never match those of executive directors, high quality non-execs must be given some incentive to put themselves forward for such a key position.

They are there to offer much more than they previously did and investors are expecting non-execs to act as proper stewards in a truly independent manner.

The days of cosy old-boys clubs with serial non-executive directors looking after each other are long gone. The fight for top quality non-executives will surely begin to heat up and it’s vital boards pay attention to proper selection, training and remuneration to attract the best talent.

Out of harm's way

Ben Griffiths — Tue, 03 Jul 2012 13:04:08 GMT

When investing in bank shares is only for the brave, something has gone dreadfully wrong.
So said business secretary Vince Cable in a speech to the Association of British Insurers chairman’s dinner just days after the revelation that Barclays - and perhaps dozens of other banks - colluded to rig key City interest rates used to price a range of financial products.

Cable rightly argued that banking needs to be boring again after customers and investors have suffered a hair-raising, roller-coaster ride of risk over the past five year. He reiterated his call for institutional investors - which the ABI represents - to take their duties as stewards of quoted companies more seriously and engage with boardrooms to stop the kind of daredevil behaviour that has drained away value from once great companies.

This is the same Vince Cable that only recently was slapped down for going to war on Rupert Murdoch in his quest to buy up the rest of satellite broadcaster BSkyB he doesn’t already own, only to later see the media mogul and his companies publicly disgraced.

Perhaps the business secretary is somebody worth listening to after all?

The question Cable tried to ask of Murdoch - why on earth are you doing this? - could equally be applied by investors to directors of our banks. Shareholders have every right to demand better behaviour from their banks.

And especially when the last few days’ revelations have made it abundantly clear that we can’t trust all executive or non-executive directors to do the job for us.

Corporate social responsibility has been a smokescreen, a mere ideal to publicly aspire to rather than a meaningful target. When they talk about CSR apparently bankers don’t mean it.
Yet responsible stewardship of our most important financial institutions is crucial. Look what’s at stake.

If our banks get seriously downgraded by the credit ratings agencies then we will be joining the likes of Italy or Spain or Greece as investment black holes.

Banks are already opting to bolster their capital buffers in order to stave off the next financial crisis rather than lending to the small and medium-sized businesses in the UK that are crying out for capital to grow, hiring more staff and creating wealth.

And this after we, the British taxpayer, have handed the banks billions by way of a bailout.
There’ still chance to sort out the mess though. Maybe the softly-spoken business secretary is just the figurehead we need to lead the industry into any sort of recovery.

A good start would be full implementation of Sir John Vickers’ recommendations to split retail and investment banking.

Returning the traditional high street bank business to its boring but reliable best would go a long way to restoring the public’s faith in financial services - as well as keeping the casino bankers safely out of harm’s way.

How a wedding sparked a data challenge?

Adam Bates — Thu, 28 Jun 2012 13:22:30 GMT

June was a pretty special month for me. I had a great holiday in Australia, which ended up with me getting married in a dried-up riverbed in place called Parachilna out in the middle of the outback.

As I flew back to London I (unromantically) was struck by how I struggle with all the data that I create and use.

My photos from the holiday (>10,000) were stored on a hard disc; with two backups.
I was carrying a CD from Harry Hookey, a talented singer who happened to be playing at the bush hotel where my new wife and I were staying, although I no longer have a CD player at home.

Most of the trip we were unable to connect to our email accounts as the local carrier did not like our phones. iTunes was reminding me to transfer everything to the iCloud by 30 June (whatever that meant).

When I reached home, I started to use Spotify for streaming music rather than iTunes. It gave me the option to download some of my favourite music from the cloud to the chip in my iPod.

This demonstrated that I continue to create many sets of different data, some stored on various discs and devices with varying degrees of back-up and some out there in different clouds which I have to say I do not understand. I find it really hard to know where different things are, and have to admit it could be controlled a lot better.

Most businesses are in exactly the same position. All are creating more and more data from existing and new devices and systems. Estimates suggest we are doubling the data universe every two years. That perhaps does not sound much, but if you consider the investment needed in storage, processors, cables, switches, systems and the like it is staggering.

Creation is not the problem, like my 10,000 photographs. In my view the real issues are: Storing the right data securely (my top 10 wedding photos are up there). Ensuring the key data is accessible, even when some of it was created on old legacy systems (like Harry Hookey’s CD). And enabling the right people to analyse the data and provide real insight on which to make timely business decisions.

I believe that many businesses are a bit like me. They do not have a really clear data strategy. They drift along adopting new systems and use and store an increasing volume of data in the cloud without really understanding the implications and risks involved. Addressing these points is merely putting things right.

Turning to the positive, the opportunities are huge for those that embrace technologies that drive change. Think of the undeniable impact of cloud-based computing to unleash innovations and streamline business activities. A subscription to the cloud based Spotify means I do not need to buy tracks from iTunes, yet another shift in consumer behaviour.

The still-developing potential of an always-on mobile communications era. I am typing this [on an old fashioned laptop!] down in Canary Wharf listening to my favourite tracks on my iPhone linked to my Spotify account somewhere out there in the cloud.

My question for those who have reached the end: are you satisfied that your organisation has a visionary data strategy?

So much hot air

Ben Griffiths — Wed, 27 Jun 2012 10:39:10 GMT

What happens when the corporate world collides with the environment was a hot topic at the United Nations’ Rio+20 summit last week, coming two decades after the Earth Summit in the same Brazilian city.

Ahead of the meeting big business was being urged to reveal what their environmental strategies are and how they are performing against those goals.

It comes soon after a survey by KPMG that revealed 95 percent of the world’s biggest 250 companies already report their corporate responsibility activities. That’s up from 14 percent in 2008, according to the report. But parallel research for Bloomberg showed 75 percent of 20,000 businesses it surveyed had no sustainability reporting.

In the past if I’ve ever been asked what my understanding is of a company’s corporate social responsibilities is I’ve been at a loss to give a sensible answer. For financial journalists the profit and loss account is usually the first port of call, along with measures such as total shareholder return - share price performance plus dividends paid - to assess how a company has fared.

But this is an attitude that needs to change. Institutional investors are increasingly concerned about how companies relate to the environment and their workers. The media needs to be too.
Insurance giant Aviva is leading the drive for corporate sustainability reporting (CSR) in the UK. It is part of a group of businesses and investors who believe there are clear benefits from thinking about what consumption of resources such as water and energy will mean longer-term.

The group wants a ‘report of explain’ rule for CSR so that anyone mulling over whether to invest could consider what that company’s activities could mean for the environment.
Aviva’s deputy executive chairman John McFarlane wrote an open letter before the Rio+20 meeting describing such reporting as “one of the most important catalysts for changes that contribute to the long-term health of a business”.

McFarlane urged the world to move from the pioneering approach of a minority of companies to a global benchmark of best practice for all companies.

Nevertheless, the Rio+20 summit has been labelled an abject failure by the environmental lobby. Pressure groups were disappointed that the language used to debate CSR reporting left it up to companies to consider reporting only “where appropriate”.

They believe this leaves CSR reporting in a weaker state than when agreement was last reached in Johannesburg in 2002. But major environmental and ethical disasters such as BP’s Gulf of Mexico oil spill have thrust green issues onto the front pages like never before.

With the City starting to sit up and take notice of the possible fallout - not least the huge destruction in shareholder value that can quickly follow a major environmental catastrophe - regulations, codes or even listing rules should be rapidly introduced to encourage better sustainability reporting within companies’ annual reports and on their websites.

Sadly without the weight of the law behind it, I fear the shift to CSR reporting will remain so much hot air.